Happy Birthday, Keyword Price Index

Fathom Online’s Keyword Price Index—the basket of search terms that tracks prices for the top five spots for the 500 most queried searches in a slew of industry categories—turned one year old in September. That means that the index now has overlapping monthly data for the first time. And that makes it worth a look at how search prices have changed from 2004 to 2005, at least for that key month of September.

The KPI tracks search terms in eight categories: automotive, consumer retail, consumer services, travel/hospitality, investment, mortgage, broadband, and wireless. For those verticals, the average keyword price rose 5% from $1.37 in September 2004 to $1.44 in 2005. weighted across those categories, the year-over-year price increase amounts to 19%.

The month-to-month picture is different. The price of the average search term fell from August 2005 to September, from $1.50 to $1.44. That’s a decrease of 4% for the month, and a full 26% off the high of last April, when the average keyword price was $1.95.

But back to the yearly comparisons. Broken out by category, the average keyword price for two verticals showed declines from last year to 2005. The mean price in automotive terms fell 2%, from $1.54 last September to $1.51 in September of this year. And the average investment keyword fell off 17% over the years, from $1.76 in 2004 to $1.46 in 2005.

Among the other categories, the biggest year-to-year increases were chalked up by consumer services—a 78% jump from 54 cents to 96 cents—and consumer retail—at 46 cents per click 44% higher than the 32 cents of September 2004. Travel/hospitality terms posted a 42% hike on average, growing from 64 cents to 91 cents.

Yearly price increases in the telecom sector were more moderate. Broadband terms rose 15% from last September to this to hit $1.62; the average wireless term increased 12% to $1.22. And the average price among mortgage-related keywords was up only 7% for the year, to $3.39.

Gregg Stewart, Fathom Online’s senior vice president for channel management and marketing, says

Holding September 2005 averages up to those of September 2004 hides some important volatility in some of the categories, Stewart says. For example, the typical mortgage keyword has actually taken a rather wild price ride over the course of the year, something not reflected in that 7% year-over-year hike. Those terms grew progressively from September 2004 to a high of $6.49 in April 2005—then declined 29% in May and kept on dropping.

“There’s a great deal of volatility month-to-month, and I think it does start to reflect what’s going on in the marketplace,” Stewart says. “The average mortgage keyword price rose at a considerable clip while the housing bubble grew up. Now that interest rates show signs of normalizing, we’re seeing some retrenchment for that set of keyword groups.”

Other categories may have been more affected by advertiser activity. Wireless prices grew only 5% year-to-year, but peaks and valleys in that average wireless term price resulted from the fact that there are relatively few advertisers in that group; therefore, changes in bidding behavior tend to show up more in keyword pricing. “if you have only five or six major brands, the entrance or exit of one advertiser can have an outsize effect on the pricing state,” Stewart says. “The consolidation of Sprint and Nextel will certainly have a short-term effect.”

The increase in the average keyword price for a category such as travel/hospitality is anomalous, he adds, because the industry is at a relatively mature stage in search marketing. “Travel has been one of the best-developed categories over time in the interactive realm,” Stewart says. “The players are very, very conscious of what their [return on investment (ROI)] is by keyword. The bidders have been around the block more than in some other categories.” Among other things, that means there’s less emotional buying based on the chairman’s wish to be first in results.

Rising keyword averages will tend to give an edge to bidders who can focus on improving their conversion rates from search. In the early developmental stage of search marketing, bidders bought large quantities of low-cost terms, and those low costs masked the fact that many of those keywords had pretty bad conversion rates. But as term prices rise, success at conversion becomes crucial to making volume work in their favor. “If I can convert better, I can become a better buyer,” Stewart says. “It gives me a hedge against inflating keyword prices. As a better converter, I can buy keywords at a better price differential, with a better margin.”

“I think that’s very representative of the lifecycle of the advertiser in this industry. We get a lot of people who get into search engine marketing (SEM) because they want to test to see if they can drive traffic. Then when it works, the 2.0 phase is to go back and figure out how to drive more sales volume and create a competitive advantage for their brand.”

And at 5%, the average year-to-year keyword price increase is still far below the increase in search marketing spending, which went up 40% in the first six months of 2005, according to the Interactive Advertising Bureau.

One factor that has acted as a price buffer is the increased volume of keywords getting bids, Stewart points out. More marketers are buying more keywords on more sites.

“As Google and Overture find ore places to distribute their ads—and we’ve seen some gigantic expansions this year in terms of contextual and local—then that holds the price state in check,” he says. “As advertisers get better at looking at the whole landscape, the Tier two and Tier Three engines and now these secondary products, that tends to keep overall keyword prices down. Sophisticated advertisers know where their ROI begins and ends, and they’re tending to go deeper into keyword lists.”

That price-balancing should only become more pronounced when MSN turns on its new AdCenter paid-search product, now in beta testing in the U.S. “You won’t see new volume when MSN and Ask Jeeves come online [with their own sponsored listings],” Stewart says. “Instead, you’ll see movement of current advertisers.”

And adding two major new sellers of search terms should make the coming year’s keyword watch even more interesting. “We expect the market to continue to fractionalize,” he says. “In a marketplace where MSN and Ask can monetize search on their own, that will force Yahoo! and Google to look for even more channels of distribution.”

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